Boeing (NYSE:BA) shares fell 4.6% in pre-open trade on Monday at ET 7:55 am (1155 GMT) following a downgrade by Bernstein. The investment firm lowered its target price for Boeing to $207 from $222, citing concerns about the company’s cash flow, defense program losses, and the challenges faced by incoming CEO Kelly Ortberg.
CEO transition amidst challenges
On July 31, Boeing reported its Q2 earnings, but the results took a backseat to the announcement of Kelly Ortberg as the new CEO, effective August 8, 2024.
Ortberg, who previously led Rockwell Collins (NYSE:COL) and Collins Aerospace, faces an uphill battle. Despite his successful track record, Boeing's scale and the complexity of its commercial and defense operations present a much more formidable challenge.
Bernstein analysts noted the difficulties an outsider might face at Boeing, pointing out that the lack of internal knowledge and personal networks could hinder the effectiveness in addressing the company’s significant issues.
Financial struggles and cash flow concerns
Boeing’s financial situation remains precarious. The company is grappling with increasing defense charges, rising inventories, and a high debt load. Free cash flow (FCF) has been severely impacted, with Bernstein now projecting that Boeing will not achieve $10 billion in FCF until 2028, a significant delay from previous estimates.
Concerns about a possible equity raise have also been voiced by investors. “While possible, we are not convinced this is necessary,” the analysts said.
The brokerage does expect Boeing’s cash balance to hit a low of $9.4 billion in the third-quarter before improving as production ramps up.
However, substantial debt repayments will likely limit near-term dividends and buybacks, adding to investor apprehensions.
Production ramp and delivery delays
Despite some positive developments in production, Boeing faces substantial delays in key programs:
737MAX: Production is on track to reach a rate of 38 per month by year-end, with an expected 100 deliveries in the fourth quarter, up from an earlier estimate of 90. The restart of deliveries to China and Air India is a positive sign, but challenges remain, particularly with the certification delays for the 737-7 and 737-10 models.
787: Production remains below the target rate of 5 per month, with only 9 deliveries in the second quarter compared to 13 in the first quarter. Supply chain constraints and additional inspections have hindered progress. Bernstein has adjusted its third quarter delivery expectations down to 19 from 29.
777X: Certification is progressing, with Boeing obtaining Type Inspection Authorization. However, first deliveries are not expected until 2025, with production currently at one per month.
Defense sector performance has been a significant drag, with Boeing reporting another $1 billion in losses from fixed-price development programs in the second quarter. This ongoing issue has consistently disappointed investors and analysts alike.
The downgrade by Bernstein, coupled with an 8.4% drop in Boeing’s stock since the earnings report, reflects the market’s concerns about the company’s future.
Despite maintaining an “Outperform” rating, Bernstein’s reduced target price underscores the cautious optimism surrounding Boeing’s recovery.